US Stocks Move Lower on Fears of Grindingly Slow Global Growth

Though US stock indices opened lower, it’s encouraging they haven’t built on that weakness, but the big worry for MoneyShow’s Jim Jubak is that investors have lost faith in the power of central bank cash to move asset prices higher or to add to economic growth.

Given the news today, it’s actually encouraging that although US stock indexes opened lower, they haven’t built on that weakness and have instead just meandered near support. The Standard & Poor’s 500 index (SPX), for example, is down 0.5% as of 2:00 PM New York time to 1953 after holding at the 1947-1948 support level.

That said, there really is no reason that stocks shouldn’t have opened lower or that they shouldn’t drift downward for the short-term. The International Monetary Fund, as expected, cut its forecasts for global growth in 2014 to 3.3% and to 3.8% in 2015. The forecast for 2015 was down from the 4% projected in April.

Expectations for inflation in EuroZone over the next five years fell to 1.8%, according to calculations by Barclays from interest rate swaps data. That’s the lowest figure for inflation expectations on record since the data began being collected a decade ago. The actual annual rate of EuroZone inflation hit a five year low of 0.3% in September. (The swaps inflation expectation historically runs ahead of actual inflation so a record low of 1.8% suggests that actual inflation will be lower than that figure.) Add that to the big decline in factory orders in Germany for August reported yesterday—the 5.9% month-to-month drop was the biggest since January 2009—and it’s hard to find a reason to be optimistic about global growth.

Now maybe—maybe—when investors start to get third quarter earnings reports beginning this week, they’ll see that US companies have been able to turn solid growth in the US economy into surprisingly strong earnings growth. Beating currently low expectations for just 4% to 5% earnings growth for the quarter wouldn’t be that hard.

But the fear in the market is that the slowdown in Europe, Latin America, Japan, and even in China—plus the strong dollar that made an appearance in the quarter—will keep earnings growth on the modest side considering that—with today’s 1953—the S&P 500 is down only 70 points or so from the all-time intraday the index set on September 18.

The big worry I have is that for key global economies—the EuroZone and Japan—investors have lost their faith in the power of central bank cash to move asset prices higher or to add to economic growth. (The Fed has already moved to the sidelines from this perspective since the US central bank has ended its asset purchase program and is looking to raise interest rates in 2015.)
Considering that faith in central banks has been the key sustaining factor in the march to all time highs, a loss of faith could turn what is, so far, a pause, into an actual 10% correction of the kind that the small-caps—or the Russell 2000, down another 0.71% so far today—are already experiencing.